How Pyramid Schemes Work

Stuff you need to know:

A pyramid scheme is any "business opportunity" in which the only real way to make money is to recruit more salespeople.

If recruiting new salespeople is the only way to make money, then those who get into the game late will never be able to find enough new recruits to recoup their money. In fact, the success of the top few levels of the pyramid requires that many people below them lose their money.

In a product-based pyramid scheme, 99.88 percent of participants never make any money. In any pyramid scheme, it's a mathematical fact that 88 percent of participants will be on the bottom level.

Multi-level marketing companies like Amway or Avon are different than pyramid schemes because participants can only make money by selling products or managing a team of salespeople (from which they get a percentage of their sales). No money is paid simply for recruiting new salespeople and participants aren't required to buy an expensive starter kit or purchase a minimum amount of supplies each month.